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Franchise Tax Board Exempts Short Sale Taxes in California
For those of you who follow my Sacramento real estate blog and listen to me blab, you already know that the IRS has issued its IRS mortgage debt relief letter that exempts certain California residents on a federal level from paying tax on the deficiency after a short sale. Everybody wants to know about short sale taxes in California, and now you can read the IRS response to short sale letter at Scribd. This isn’t much help to homeowners in other states, but I sell real estate in California, so I follow closely mostly what happens to short sale sellers in Sacramento.
This morning I feel like one of those Ron Popeil commercials, but wait, there is MORE! Not only are most short sale sellers in California exempt from paying tax on mortgage debt relief to the IRS, but the State of California has issued a letter ruling that Californians are exempt from state income tax liability for a short sale as well. Short sale taxes in California just headed south. The letter was issued by the California Franchise Tax Board and obtained by the California State Board of Equalization, as announced by the California Association of REALTORS, working with Senator Barbara Boxer.
What does all of this mean? It means while homeowners are left chewing on their fingernails about the 2007 Mortgage Forgiveness Debt Relief Act expiring at the end of 2013, coupled with the fact California still has not extended its own version of the act for 2012, that sellers can pretty much raise a middle finger and call it a day. Goodbye short sale taxes in California. Doesn’t seem to much matter what our legislators do, on a national or state level, because we now have letters of clarification that provide protection for the bulk of distressed sellers after a short sale.
George Runner, a member of the Board of Equalization, is in the spotlight for obtaining the letter. I can’t find the letter on his website, though. For the interim, those of you who would be exempt if our men and women in the legislature had ever gotten it together enough to rub two nickels and pass the darn exemption, can coast through this concern. Be sure to check with your accountant to ensure that and your short sale qualifies for the exemption from mortgage debt relief.
Taxes for that Sacramento Short Sale
Time is running out to avoid paying taxes on a Sacramento short sale. The 2007 Mortgage Forgiveness Debt Relief Act expires on December 31, 2012. This is the law that exempts a short sale seller from paying taxes on forgiven debt for a personal residence. Will the law be extended? Most likely, if the past is any indication and the future continues to be as uncertain as it is. You know how they say history repeats itself. That’s because it does. And we have an election year. It’s in the 2013 budget.
Some of you may not recall what happened last go-around with this short sale tax issue. When it expired, it was not renewed right away for the following year. Sellers were closing short sales fearing the worst: that not only did they lose their home, but now the government would be sticking outs its hand and taxing them on the short fall difference. We had California taxes to deal with at the same time. It was a scary problem. Congress dinged around on the short sale taxation extension and finally granted the extension. Then our California exemption came through, too. Just in time for taxes. And it was made retroactive. We were all biting our fingernails.
I am working on a Bank of America HAFA short sale. Yeah, I know, I’m a sucker for punishment. I have a few of them. You can read all the government rules for HAFA about the timeframes to process a HAFA short sale, and they are pretty much meaningless. It takes Bank of America a good 4 months, on average, to approve a HAFA short sale. If you’re teamed up with a Green Tree mortgage in second position, God help you. Green Tree closes files after 90 days. So, you can see the problem. Not only that, but after 6 months, Green Tree sends its loans to charge off. It’s better not to have a short sale charge off if you can avoid it.
This particular seller is very concerned that she won’t close this year. I believe she will. It’s been 9 months already. You can get pregnant and give birth in that period of time. Bring a tiny new life form into being. But that HAFA short sale at Bank of America can’t close within a reasonable timeframe.
Your safest bet is to close your short sale escrow within the confines of the 2012 calendar year. That way there is no question. But if you have to rollover into 2013, do so knowing it’s a risk. Although, a calculated risk. Do you think the government will hang all of these short sellers out to dry? This Sacramento short sale agent says probably not. Not if history repeats itself.
